##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---



FORM 10-Q



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Quarterly Report Pursuant to Section
13 or 15(d)

of the Securities Exchange Act of 1934



|                                          |  |                               
|----------------------------------------- |  | ------------------------------
|For the three months ended March 31, 2004 |  | Commission File Number 0-14371



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COMPUCOM SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 38-2363156                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|7171 Forest Lane, Dallas, TX                                   |  | 75230                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             



Registrants
telephone number, including area code: (972) 856-3600



---



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No ̈



The number of shares of the
Registrants common stock outstanding as of May 5, 2003 was 50,198,624 shares.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Index



|         |  |                                                                                            |  |     
|-------- |  | ------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                            |  | Page
|PART I.  |  | FINANCIAL INFORMATION                                                                      |  |     
|         |  |                                                                                           
|Item 1.  |  | Financial Statements (unaudited)                                                           |  |     
|         |  |                                                                                           
|         |  | Condensed Consolidated Balance Sheets March 31, 2004 and December 31, 2003                 |  | 3   
|         |  |                                                                                           
|         |  | Condensed Consolidated Statements of Operations Three months ended March 31, 2004 and 2003 |  | 4   
|         |  |                                                                                           
|         |  | Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2004 and 2003 |  | 5   
|         |  |                                                                                           
|         |  | Notes to Condensed Consolidated Financial Statements                                       |  | 6   
|         |  |                                                                                           
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations      |  | 12  
|         |  |                                                                                           
|Item 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                  |  | 19  
|         |  |                                                                                           
|Item 4.  |  | Controls and Procedures                                                                    |  | 19  
|         |  |                                                                                           
|PART II. |  | OTHER INFORMATION                                                                          |  |     
|         |  |                                                                                           
|Item 1.  |  | Legal Proceedings                                                                          |  | 20  
|         |  |                                                                                           
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                           |  | 20  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)



|                                           |  |               |         |                  |   |        
|------------------------------------------ |  | ------------- | ------- | ---------------- | - | -------
|                                           |  | March 31,2004 |         | December 31,2003
|Assets                                     |  |               |         |                  |   |        
|Current assets:                            |  |               |         |                  |   |        
|Cash and cash equivalents                  |  | $             | 89,565  |                  | $ | 81,145 
|Receivables, net                           |  |               | 141,550 |                  |   | 213,119
|Inventories                                |  |               | 28,335  |                  |   | 35,612 
|Other                                      |  |               | 4,731   |                  |   | 4,252  
|                                           |  |               |         |                  |   |        
|Total current assets                       |  |               | 264,181 |                  |   | 334,128
|                                           |  |              
|Property and equipment, net                |  |               | 18,973  |                  |   | 19,134 
|                                           |  |              
|Goodwill and other intangible assets, net  |  |               | 106,165 |                  |   | 106,925
|Other                                      |  |               | 625     |                  |   | 533    
|                                           |  |               |         |                  |   |        
|Total assets                               |  | $             | 389,944 |                  | $ | 460,720
|                                           |  |               |         |                  |   |        
|Liabilities and Stockholders Equity       |  |               |         |                  |   |        
|Current liabilities:                       |  |               |         |                  |   |        
|Accounts payable                           |  | $             | 68,171  |                  | $ | 105,344
|Accrued liabilities                        |  |               | 45,950  |                  |   | 81,800 
|                                           |  |               |         |                  |   |        
|Total current liabilities                  |  |               | 114,121 |                  |   | 187,144
|                                           |  |              
|Deferred income tax liability              |  |               | 2,478   |                  |   | 2,008  
|                                           |  |              
|Stockholders equity:                      |  |               |         |                  |   |        
|Preferred stock                            |  |               | 15,000  |                  |   | 15,000 
|Common stock                               |  |               | 502     |                  |   | 501    
|Additional paid-in capital                 |  |               | 78,302  |                  |   | 78,015 
|Retained earnings                          |  |               | 179,541 |                  |   | 178,052
|                                           |  |               |         |                  |   |        
|Total stockholders equity                 |  |               | 273,345 |                  |   | 271,568
|                                           |  |               |         |                  |   |        
|Total liabilities and stockholders equity |  | $             | 389,944 |                  | $ | 460,720
|                                           |  |               |         |                  |   |        



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)



|                                            |  |                             |         |   |      |   |        
|------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | -------
|                                            |  | Three months endedMarch 31,
|                                            |  | 2004                        |         |   | 2003
|Revenue:                                    |  |                             |         |   |      |   |        
|Product                                     |  | $                           | 220,788 |   |      | $ | 257,418
|Service                                     |  |                             | 79,230  |   |      |   | 72,879 
|                                            |  |                             |         |   |      |   |        
|Total revenue                               |  |                             | 300,018 |   |      |   | 330,297
|                                            |  |                             |         |   |      |   |        
|Cost of revenue:                            |  |                             |         |   |      |   |        
|Product                                     |  |                             | 206,930 |   |      |   | 235,618
|Service                                     |  |                             | 53,051  |   |      |   | 50,306 
|                                            |  |                             |         |   |      |   |        
|Total cost of revenue                       |  |                             | 259,981 |   |      |   | 285,924
|                                            |  |                             |         |   |      |   |        
|Gross margin                                |  |                             | 40,037  |   |      |   | 44,373 
|                                            |  |                            
|Operating expenses:                         |  |                             |         |   |      |   |        
|Selling                                     |  |                             | 10,968  |   |      |   | 10,659 
|Service                                     |  |                             | 9,427   |   |      |   | 9,251  
|General and administrative                  |  |                             | 13,434  |   |      |   | 14,616 
|Depreciation and amortization               |  |                             | 3,414   |   |      |   | 4,180  
|                                            |  |                             |         |   |      |   |        
|Total operating expenses                    |  |                             | 37,243  |   |      |   | 38,706 
|                                            |  |                             |         |   |      |   |        
|Earnings from operations                    |  |                             | 2,794   |   |      |   | 5,667  
|                                            |  |                            
|Financing expenses, net                     |  |                             | (63     | ) |      |   | 85     
|                                            |  |                             |         |   |      |   |        
|Earnings before income taxes                |  |                             | 2,857   |   |      |   | 5,582  
|                                            |  |                            
|Income taxes                                |  |                             | 1,143   |   |      |   | 2,233  
|                                            |  |                             |         |   |      |   |        
|Net earnings                                |  | $                           | 1,714   |   |      | $ | 3,349  
|                                            |  |                             |         |   |      |   |        
|Basic and diluted earnings per common share |  | $                           | .03     |   |      | $ | .06    
|                                            |  |                            
|Average common shares outstanding:          |  |                             |         |   |      |   |        
|Basic                                       |  |                             | 50,134  |   |      |   | 49,308 
|Diluted                                     |  |                             | 52,486  |   |      |   | 51,150 



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



|                                                                                              |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                              |  | Three months endedMarch 31, |        
|                                                                                              |  | 2004                        |         |   | 2003 |  
|Cash flows from operating activities:                                                         |  |                             |         |   |      |   |         |  
|Net earnings                                                                                  |  | $                           | 1,714   |   |      | $ | 3,349   |  
|Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                                 |  |                             | 3,414   |   |      |   | 4,180   |  
|Deferred income taxes                                                                         |  |                             | 488     |   |      |   | 983     |  
|Changes in assets and liabilities:                                                            |  |                             |         |   |      |   |         |  
|Receivables                                                                                   |  |                             | 71,569  |   |      |   | 53,292  |  
|Inventories                                                                                   |  |                             | 7,277   |   |      |   | 4,394   |  
|Other current assets                                                                          |  |                             | (542    | ) |      |   | (397    | )
|Accounts payable                                                                              |  |                             | (37,173 | ) |      |   | (31,229 | )
|Accrued liabilities and other                                                                 |  |                             | (35,930 | ) |      |   | (21,282 | )
|                                                                                              |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                     |  |                             | 10,817  |   |      |   | 13,290  |  
|                                                                                              |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                                         |  |                             |         |   |      |   |         |  
|Capital expenditures                                                                          |  |                             | (2,460  | ) |      |   | (2,327  | )
|                                                                                              |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                         |  |                             | (2,460  | ) |      |   | (2,327  | )
|                                                                                              |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                                         |  |                             |         |   |      |   |         |  
|Issuance of common stock                                                                      |  |                             | 288     |   |      |   | 72      |  
|Preferred stock dividends                                                                     |  |                             | (225    | ) |      |   | (225    | )
|                                                                                              |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                           |  |                             | 63      |   |      |   | (153    | )
|                                                                                              |  |                             |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                     |  |                             | 8,420   |   |      |   | 10,810  |  
|Cash and cash equivalents at beginning of period                                              |  |                             | 81,145  |   |      |   | 128,039 |  
|                                                                                              |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                    |  | $                           | 89,565  |   |      | $ | 138,849 |  
|                                                                                              |  |                             |         |   |      |   |         |  



See accompanying notes to condensed
consolidated financial statements.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



|(1) | General
|--- | -------



These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the summary of
significant accounting policies and notes thereto included in the 2003 Annual Report on Form 10-K for CompuCom Systems, Inc. (CompuCom or the Company). The information furnished is unaudited but reflects all adjustments,
consisting only of normal recurring accruals, which are in the opinion of management necessary for a fair presentation of the results for these interim periods. Interim results are not necessarily indicative of results expected for the full year.



|(2) | Contingencies
|--- | -------------



CompuCom is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, these matters are not
material.



|(3) | Earnings per share
|--- | ------------------



In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, basic earnings per common share
have been computed based on net earnings after preferred stock dividend requirements and the weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes conversion of dilutive convertible
securities into common stock at the later of the beginning of the period or date of issuance and includes the add-back of related dividends, as required. Diluted earnings per common share also assumes the exercise of all options with an exercise
price below the average market price of the Companys stock, at the later of the beginning of the period or date of issuance, regardless of whether the options are vested or not. Earnings per common share have been computed as follows (in
thousands, except per share data):



|                                          |  |                                   |       |   |                     |        |     |   |    
|----------------------------------------- |  | --------------------------------- | ----- | - | ------------------- | ------ | --- | - | ---
|                                          |  | Three months ended March 31, 2004
|                                          |  | Earnings(Numerator)               |       |   | Shares(Denominator) |        | EPS
|Net earnings                              |  | $                                 | 1,714 |   |                     |        |     |   |    
|Less: Preferred stock dividends           |  |                                   | (225  | ) |                     |        |     |   |    
|                                          |  |                                   |       |   |                     |        |     |   |    
|Basic EPS                                 |  |                                   |       |   |                     |        |     |   |    
|Earnings available to common shareholders |  |                                   | 1,489 |   |                     | 50,134 |     | $ | .03
|                                          |  |                                   |      
|Effect of dilutive securities             |  |                                   |       |   |                     |        |     |   |    
|Stock options                             |  |                                   |       |   |                     | 2,294  |     |   |    
|Employee stock purchase plan              |  |                                   |       |   |                     | 58     |     |   |    
|                                          |  |                                   |       |   |                     |        |     |   |    
|Diluted EPS                               |  |                                   |       |   |                     |        |     |   |    
|Earnings available + assumed conversions  |  | $                                 | 1,489 |   |                     | 52,486 |     | $ | .03
|                                          |  |                                   |       |   |                     |        |     |   |    



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Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



|                                          |  |                                   |       |   |                     |        |     |   |    
|----------------------------------------- |  | --------------------------------- | ----- | - | ------------------- | ------ | --- | - | ---
|                                          |  | Three months ended March 31, 2003
|                                          |  | Earnings(Numerator)               |       |   | Shares(Denominator) |        | EPS
|Net earnings                              |  | $                                 | 3,349 |   |                     |        |     |   |    
|Less: Preferred stock dividends           |  |                                   | (225  | ) |                     |        |     |   |    
|                                          |  |                                   |       |   |                     |        |     |   |    
|Basic EPS                                 |  |                                   |       |   |                     |        |     |   |    
|Earnings available to common shareholders |  |                                   | 3,124 |   |                     | 49,308 |     | $ | .06
|                                          |  |                                   |      
|Effect of dilutive securities             |  |                                   |       |   |                     |        |     |   |    
|Stock options                             |  |                                   |       |   |                     | 1,776  |     |   |    
|Employee stock purchase plan              |  |                                   |       |   |                     | 66     |     |   |    
|                                          |  |                                   |       |   |                     |        |     |   |    
|Diluted EPS                               |  |                                   |       |   |                     |        |     |   |    
|Earnings available + assumed conversions  |  | $                                 | 3,124 |   |                     | 51,150 |     | $ | .06
|                                          |  |                                   |       |   |                     |        |     |   |    



CompuCom has excluded
2,417,657 and 3,979,300 shares from its calculations of diluted earnings per share for the three months ended March 31, 2004 and 2003, respectively, as they are considered anti-dilutive.



|(4) | Stock-Based Compensation
|--- | ------------------------



CompuCom uses the intrinsic-value method as provided by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
in accounting for its various fixed stock option plans and its employee stock purchase plan (ESPP) and provides pro forma disclosures of the compensation expense determined under the fair value provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, CompuCom did not recognize compensation expense upon the issuance of its
stock options because the option terms were fixed and the exercise price equaled the market price of CompuComs common stock on the date of grant.



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Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



The following table displays the effect on net earnings and earnings per
share had the fair value method been applied during each period presented (in thousands, except per share data):



|                                                                         |  |             |       |                              |     |       |   |    
|------------------------------------------------------------------------ |  | ----------- | ----- | ---------------------------- | --- | ----- | - | ---
|                                                                         |  |             |       | Three months ended March 31,
|                                                                         |  |             |       | 2004                         |     | 2003 
|Net earnings as reported                                                 |  | $           | 1,714 |                              | $   | 3,349
|Stock-based compensation excluded from reported net earnings, net of tax |  |             | 198   |                              |     | 412  
|                                                                         |  |             |       |                              |     |       |   |    
|Pro forma net earnings                                                   |  | $           | 1,516 |                              | $   | 2,937
|                                                                         |  |             |       |                              |     |       |   |    
|Basic earnings per share                                                 |  | As reported |       | $                            | .03 |       | $ | .06
|                                                                         |  | Pro forma   |       | $                            | .03 |       | $ | .06
|                                                                         |  |             |      
|Diluted earnings per share                                               |  | As reported |       | $                            | .03 |       | $ | .06
|                                                                         |  | Pro forma   |       | $                            | .02 |       | $ | .05



|(5) | Goodwill and Other Intangible Assets
|--- | ------------------------------------



Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following
table provides a summary of CompuComs intangible assets with definite useful lives as of March 31, 2004 and December 31, 2003 (in thousands):



|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|---------------- |  | ------------------ |  | ------------------ | ------ | ----------------------- | - | ------ |  | - | -----
|                 |  |                    |  | March 31, 2004    
|                 |  | AmortizationPeriod |  | GrossCarryingValue |        | AccumulatedAmortization |   | Net   
|Customer-related |  | 6  11 years       |  | $                  | 15,467 |                         | $ | 12,071 |  | $ | 3,396
|Contract-related |  | 24  36 months     |  |                    | 2,840  |                         |   | 2,324  |  |   | 516  
|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|Total            |  |                    |  | $                  | 18,307 |                         | $ | 14,395 |  | $ | 3,912
|                 |  |                    |  |                    |        |                         |   |        |  |   |      



|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|---------------- |  | ------------------ |  | ------------------ | ------ | ----------------------- | - | ------ |  | - | -----
|                 |  |                    |  | December 31, 2003 
|                 |  | AmortizationPeriod |  | GrossCarryingValue |        | AccumulatedAmortization |   | Net   
|Customer-related |  | 6  11 years       |  | $                  | 15,467 |                         | $ | 11,480 |  | $ | 3,987
|Contract-related |  | 24  36 months     |  |                    | 2,840  |                         |   | 2,155  |  |   | 685  
|                 |  |                    |  |                    |        |                         |   |        |  |   |      
|Total            |  |                    |  | $                  | 18,307 |                         | $ | 13,635 |  | $ | 4,672
|                 |  |                    |  |                    |        |                         |   |        |  |   |      



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



Amortization expense related to intangible assets with definite useful lives
was $0.8 million for each of the three months ended March 31, 2004 and 2003, respectively. The following table provides estimated amortization expense related to intangible assets with definite useful lives for each of the years in the five year
period ending December 31, 2008 and thereafter (in thousands):



|                    |  |   |      
|------------------- |  | - | -----
|Remainder of 2004   |  | $ | 1,734
|2005                |  |   | 579  
|2006                |  |   | 246  
|2007                |  |   | 246  
|2008                |  |   | 246  
|2009 and thereafter |  |   | 861  
|                    |  |   |      
|                    |  | $ | 3,912
|                    |  |   |      



There has been no
change in the carrying amount of goodwill for the three months ended March 31, 2004.



|(6) | Segment Information
|--- | -------------------



CompuCom defines its operations as two distinct businesses - 1) product - which primarily consists of multi-vendor procurement services and support for a
wide array of technologies, including personal computer products, certain Unix-based systems, servers, networking and storage products, peripherals, software-related products and licenses, and mobile and wireless computing devices and 2) service -
which is composed of various offerings. IT Outsourcing services (ITO) include infrastructure management services consisting of the following: multi-vendor hardware and software support/deployment/migration, help desk, remote network
management, IT asset management and software patch management. IT Consulting and Systems Integration (IT Consulting) services includes the design, development, and integration of complex applications including application design and
development, project management, application development staffing and testing, and technical event management. Other offerings include complex configuration and imaging, vendor warranty contracts, software licensing management fees, and services
provided in support of certain manufacturers direct fulfillment initiatives. CompuCom measures segment earnings as operating earnings, defined as income before financing expenses, net and income taxes. All significant inter-segment activity
has been eliminated.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



|                                 |  |         |         |   |         |   |        |  |   |         |  
|-------------------------------- |  | ------- | ------- | - | ------- | - | ------ |  | - | ------- | -
|Quarter Ended March 31, 2004     |  |         |         |   |         |   |        |  |   |         |  
|                                 |  |         |        
|Operating Results (in
thousands) |  | Product |         |   | Service |   | Total  | 
|Revenues                         |  | $       | 220,788 |   |         | $ | 79,230 |  | $ | 300,018 |  
|Gross margin                     |  |         | 13,858  |   |         |   | 26,179 |  |   | 40,037  |  
|Operating earnings (loss)        |  |         | (4,408  | ) |         |   | 7,202  |  |   | 2,794   |  
|Financing expenses, net          |  |         |         |   |         |   |        |  |   | (63     | )
|                                 |  |         |         |   |         |   |        |  |   |         |  
|Earnings before income taxes     |  |         |         |   |         |   |        |  | $ | 2,857   |  
|                                 |  |         |         |   |         |   |        |  |   |         |  



|                                 |  |         |         |         |   |        |  |   |        
|-------------------------------- |  | ------- | ------- | ------- | - | ------ |  | - | -------
|Quarter Ended March 31, 2003     |  |         |         |         |   |        |  |   |        
|                                 |  |         |        
|Operating Results (in
thousands) |  | Product |         | Service |   | Total 
|                                 |  |         |         |         |   |        |  |   |        
|Revenues                         |  | $       | 257,418 |         | $ | 72,879 |  | $ | 330,297
|Gross margin                     |  |         | 21,800  |         |   | 22,573 |  |   | 44,373 
|Operating earnings               |  |         | 1,395   |         |   | 4,272  |  |   | 5,667  
|Financing expenses, net          |  |         |         |         |   |        |  |   | 85     
|                                 |  |         |         |         |   |        |  |   |        
|Earnings before income taxes     |  |         |         |         |   |        |  | $ | 5,582  
|                                 |  |         |         |         |   |        |  |   |        



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements

March 31, 2004

(unaudited)



|(7) | Financing Arrangements
|--- | ----------------------



At March 31, 2004, CompuCom had financing arrangements which total $75 million, consisting of a $50 million receivable securitization facility
(Securitization) and a $25 million working capital line of credit (Revolver).



The Securitizations pricing is based on a designated short-term interest rate plus an agreed upon spread. The Securitization allows CompuCom to
sell, on an ongoing basis, its trade accounts receivable (receivables) to a consolidated, wholly-owned bankruptcy-remote special purpose subsidiary (the SPS). The risk that CompuCom bears from bad debt losses on receivables
sold is addressed in its allowance for doubtful accounts. The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership interest in the pool of purchased receivables to financial institutions. As collections
reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. The sales are reflected as reductions of Receivables in the Condensed Consolidated Balance Sheets and are
included in the net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used primarily to fund working capital requirements. CompuCom retains the portion of the
sold receivables that are in excess of the amounts outstanding, referred to as retained interest. The carrying amount of CompuComs retained interest, which approximates fair value because of the short term nature of the receivables, is
reflected in Receivables in the Condensed Consolidated Balance Sheets. CompuCom is retained as servicer of the receivables; however, the cost of servicing is not material. Discounts associated with the sale of receivables totaled $0.1 million and
$0.3 million for the three months ended March 31, 2004 and 2003, respectively, and are included in Financing expenses, net in the Condensed Consolidated Statements of Operations. Amounts outstanding as sold receivables as of March 31, 2004 consisted
of one $10 million certificate with an October 2005 maturity date.



The Revolver, which has a June 2004 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuComs assets. CompuCom anticipates extending or renewing the Revolver. Availability under
the Revolver is subject to a borrowing base calculation. As of March 31, 2004, availability under the Revolver was $25 million. No amounts were outstanding under the Revolver as of March 31, 2004 and December 31, 2003. Terms of the Revolver limit
the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver require CompuCom to maintain compliance with selected financial covenants.



Interest income of $0.2 million and $0.3 million was earned during the three months ended March 31, 2004 and 2003,
respectively, and is included in Financing expenses, net, in the Condensed Consolidated Statements of Operations.



|(8) | Reclassifications
|--- | -----------------



Certain prior year amounts have been reclassified to conform to the current year presentation.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations

March 31, 2004



Founded in 1987, CompuCom Systems, Inc. (CompuCom)
is a national leader in helping companies plan, implement and manage multi-vendor, industry standard computing environments. Our integrated portfolio of service and product offerings help clients reduce the costs, complexities, obstacles and risks
associated with new technology adoption and acquisition, operational transition and on-going management of their information systems.



Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations

March 31, 2004



Results of Operations



The following table shows our total revenue, gross margin and gross margin percentage by revenue source. Operating expenses, financing expenses, income taxes and net
earnings are shown as a percentage of total revenue for the three months ended March 31, 2004 and 2003 (in thousands):



|                              |  |                            |         |   |      |   |         |  
|----------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                              |  | Three months endedMarch 31 |        
|                              |  | 2004                       |         |   | 2003 |  
|Revenue:                      |  |                            |         |   |      |   |         |  
|Product                       |  | $                          | 220,788 |   |      | $ | 257,418 |  
|Service                       |  |                            | 79,230  |   |      |   | 72,879  |  
|                              |  |                            |         |   |      |   |         |  
|Total revenue                 |  | $                          | 300,018 |   |      | $ | 330,297 |  
|                              |  |                            |         |   |      |   |         |  
|Gross margin:                 |  |                            |         |   |      |   |         |  
|Product                       |  | $                          | 13,858  |   |      | $ | 21,800  |  
|Service                       |  |                            | 26,179  |   |      |   | 22,573  |  
|                              |  |                            |         |   |      |   |         |  
|Total gross margin            |  | $                          | 40,037  |   |      | $ | 44,373  |  
|                              |  |                            |         |   |      |   |         |  
|Gross margin percentage:      |  |                            |         |   |      |   |         |  
|Product                       |  |                            | 6.3     | % |      |   | 8.5     | %
|Service                       |  |                            | 33.0    | % |      |   | 31.0    | %
|                              |  |                            |         |   |      |   |         |  
|Total gross margin percentage |  |                            | 13.3    | % |      |   | 13.4    | %
|Operating expenses:           |  |                            |         |   |      |   |         |  
|Selling                       |  |                            | 3.7     | % |      |   | 3.2     | %
|Service                       |  |                            | 3.1     | % |      |   | 2.8     | %
|General and administrative    |  |                            | 4.4     | % |      |   | 4.4     | %
|Depreciation and amortization |  |                            | 1.1     | % |      |   | 1.3     | %
|                              |  |                            |         |   |      |   |         |  
|Total operating expenses      |  |                            | 12.3    | % |      |   | 11.7    | %
|                              |  |                            |         |   |      |   |         |  
|Earnings from operations      |  |                            | 1.0     | % |      |   | 1.7     | %
|                              |  |                           
|Financing expenses, net       |  |                            | 0.0     | % |      |   | 0.0     | %
|                              |  |                            |         |   |      |   |         |  
|Earnings before income taxes  |  |                            | 1.0     | % |      |   | 1.7     | %
|                              |  |                           
|Income taxes                  |  |                            | 0.4     | % |      |   | 0.7     | %
|                              |  |                            |         |   |      |   |         |  
|Net earnings                  |  |                            | 0.6     | % |      |   | 1.0     | %
|                              |  |                            |         |   |      |   |         |  



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Comparison of the Quarter Ended March 31, 2004 to the
Quarter Ended March 31, 2003



Product revenue primarily
consists of hardware products and software-related products and licenses. Hardware products include multi-vendor procurement services and support for a wide array of technologies, including personal computer products, certain Unix-based systems,
servers, networking and storage products, peripherals, and mobile and wireless computing devices. Software-related products and licenses revenues that are included in total product revenue consist of sales to our clients for which we function as a
reseller of the software-related product or license. Alternatively, software-related products and licenses may be sold to our clients directly by the software vendor. In these cases, we function as an advisor to our client and receive a fee for the
services we provide. Software fee revenues are included in service revenue.



Product revenue decreased 14.2% to $220.8 million in the first quarter of 2004 from $257.4 million in the first quarter of 2003. The hardware portion of total product revenue decreased 16.6% to $172.4 million in the
first quarter of 2004 from $206.8 million in the first quarter of 2003. The decline in the hardware portion of total product revenue was primarily the result of softness in demand, particularly among our large enterprise clients. Contributing to the
decline was a reduction in the percent of our business from enterprise class products, such as servers and storage. The software portion of total product revenue decreased 4.5% to $48.4 million in the first quarter 2004 from $50.6 million in the
first quarter 2003. The decrease in the software portion of total product revenue was primarily because we sold more software licensing vehicles for which we recorded a fee rather than gross revenue. On a sequential basis, hardware revenue declined
30.7% and software revenue declined 44.9%. Due to normal seasonality, we generally experience sequential decreases in both the hardware and software portions of product revenue. Also contributing to the hardware decline was the impact of soft demand
we experienced from our large enterprise clients. The sequential decrease in software-related revenue was also impacted by our sale of more software licensing vehicles for which we recorded a fee rather than gross revenue.



Product gross margin is the difference between product revenue and the cost
of that product revenue. The cost of product revenue consists primarily of the price CompuCom pays to acquire the product from the vendor. Product gross margin dollars declined $7.9 million to $13.9 million in the first quarter 2004 from $21.8
million in the first quarter 2003. Product gross margin as a percentage of product revenue decreased to 6.3% in the first quarter of 2004 from 8.5% in the first quarter of 2003. We believe the decrease in product gross margin as a percentage of
product revenue was primarily due to lower volume incentive dollars received from suppliers, as well as an increase in the mix of lower margin software revenue relative to total product revenue and continued pricing pressure. Sequentially, product
gross margins were relatively consistent. Due to economic and competitive conditions, we may experience continued pressure on both product revenue and product gross margin, the result of which may be to report both lower product revenue and gross
margin dollars, as well as a lower gross margin percentage when compared to the comparable prior year period or previous quarter.



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Managements Discussion and Analysis of Financial Condition and Results of Operations



Service revenue is composed of various offerings. Our IT Outsourcing services
(ITO) include infrastructure management services consisting of the following: multi-vendor hardware and software support/deployment/migration, help desk, remote network management, IT asset management and software patch management. Our
IT Consulting and Systems Integration (IT Consulting) services includes the design, development, and integration of complex applications including application design and development, project management, application development staffing
and testing, and technical event management. Other offerings include complex configuration and imaging, vendor warranty contracts, and software licensing management fees. Service revenue reflects revenue generated by the actual performance of
specific services and does not include product sales.



Service
revenue increased 8.7% to $79.2 million for the first quarter of 2004 from $72.9 million for the first quarter of 2003, while sequentially remaining essentially flat. This increase was primarily due to increases in our application development
staffing and testing services, ITO services and fees earned from our software licensing management services. These increases were partially offset by a decrease in services provided to the federal government.



Service gross margin is the difference between service revenue and the cost
of that service revenue. Service gross margin, both in absolute dollars and as a percentage of service revenue, is generally impacted by a number of factors including pricing, utilization, and the relative mix of our service offerings at any point
in time. These factors may result in material fluctuations between periods. Service gross margin dollars increased $3.6 million to $26.2 million in the first quarter 2004 from $22.6 million in the first quarter 2003. Sequentially, service gross
margin dollars increased $2.3 million. The increase in service gross margin dollars, both in comparison to the first quarter 2003 and the fourth quarter 2003, was primarily the result of increases in fees earned from our software management
services. In addition, service gross margin dollars increased in the first quarter 2004 as compared to the first quarter 2003 as a result of an increase in our application development staffing and testing services. Service gross margin as a
percentage of service revenue for the quarter ended March 31, 2004 was 33.0% compared to 31.0% for the same period in 2003 and 30.0% in the fourth quarter 2003. The increase in service gross margin as a percentage of service revenue, both in
comparison to the first quarter of 2003 and the fourth quarter of 2003, was primarily the result of the increase in fees earned from our software management services. We expect to experience continued pressure on both service revenue and service
gross margin, the result of which may be to report lower service revenue and related service gross margin when compared to the comparable prior year period or previous quarter.



Selling expenses consist primarily of salary, commissions and benefits for sales and sales-support personnel, along with
other costs directly related to such personnel. Selling expenses increased $0.3 million for the three months ended March 31, 2004 as compared to the same period in the prior year. The increase in selling expenses was primarily due to an increase in
our personnel and related costs associated with our investment in the expansion and greater specialization of our sales force. Selling expenses as a percentage of revenue increased to 3.7% for the three months ended March 31, 2004 from 3.2% for the
same period a year ago. The increase in selling expenses as a percentage of revenue was primarily attributable to the decrease in total revenue over the comparable periods.



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Managements Discussion and Analysis of Financial Condition and Results of Operations



Service expenses consist primarily of salary and benefits cost for personnel
supporting the service business, along with other costs directly related to such personnel. Service expenses were essentially flat when compared to the comparable period in the prior year. As a percentage of revenue, service expenses increased to
3.1% for the three months ended March 31, 2004 from 2.8% for the same period a year ago. The increase in service expenses as a percentage of revenue was primarily attributable to the decrease in total revenue over the comparable periods.



General and administrative expenses consist principally of salary and
benefit costs for executive, operations, information services, and administrative personnel, along with certain infrastructure costs directly related to such personnel, professional services and other general corporate activities. General and
administrative expenses decreased $1.2 million for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003. The decrease is reflective of our ongoing cost management efforts which primarily include certain
infrastructure costs, in particular occupancy-related expenses. Sequentially, general and administrative expenses decreased $1.1 million. The sequential decline was primarily a result of reduced professional services and occupancy-related expenses,
partially offset by an increase in personnel and related costs. General and administrative expenses remained flat as a percentage of revenue at 4.4% for the comparable periods. Operating expenses are reported net of reimbursements by certain
manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred, and any cash paid in excess of the actual expense is recorded as a reduction of cost of sales.



Depreciation and amortization expense decreased approximately $0.8 million
for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003. As a percentage of revenue, depreciation and amortization expense decreased from 1.3% to 1.1% during the same periods.



Financing expenses, net consists of both financing costs and interest earned
on available cash. For the quarter ended March 31, 2004, interest income earned from the investment of available cash exceeded financing expenses. This compares to net financing expense of $0.8 million incurred during the first quarter 2003. The
decrease in financing expenses, net was primarily due to the fourth quarter 2003 reduction in amounts utilized under our receivable securitization.



As a result of the factors discussed above, we recorded net earnings for the quarter ended March 31, 2004 of $1.7 million. This compares to first quarter
2003 net earnings of $3.3 million.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Managements Discussion and Analysis of Financial Condition and Results of Operations



Liquidity and Capital Resources



Working capital at March 31, 2004 was $150.1 million compared to $147.0
million at December 31, 2003, resulting in a current ratio of 2.31 at March 31, 2004 compared to 1.79 at December 31, 2003. The increase in working capital was primarily the result of declines in accounts payable and accrued liabilities, partially
offset by declines in receivables and inventories. The declines in accounts payable, accrued liabilities, receivables and inventories were all attributable to the seasonal decline in revenue in the first quarter of 2004 as compared to the fourth
quarter of 2003.



Our liquidity is impacted by the dollar
volume of certain manufacturers customer specific rebate programs. Under these programs, we are required to pay a higher initial amount for product and then claim a rebate from the manufacturer to reduce the final cost. These rebates are then
passed on to the customer in the form of a reduced sales price. The collection of these rebates can take an extended period of time. Due to these programs, our initial cost for the product is often higher than the sales price we can obtain from our
clients. These programs have been at times a material factor in our financing needs. As of March 31, 2004 and December 31, 2003, we were owed approximately $6.7 million and $18.6 million, respectively, under these vendor rebate programs. These
outstanding amounts are included as a reduction to Accounts payable on the Condensed Consolidated Balance Sheets.



In addition, we participate in certain programs provided by various suppliers that enable us to earn volume incentive dollars. These incentives are
generally earned by achieving quarterly sales targets. The amounts earned under these programs are recorded as a reduction to cost of goods sold and as Receivables on the Condensed Consolidated Balance Sheets. As of March 31, 2004 and December 31,
2003, CompuCom was owed approximately $2.9 million and $2.6 million, respectively, under these supplier incentive programs.



Our working capital requirements are generally funded through financing arrangements and internally generated funds. As of March 31, 2004, our financing
arrangements consisted of a $50 million receivable securitization facility (Securitization) and a $25 million working capital line of credit (Revolver). The Securitizations pricing is based on a designated short-term
interest rate plus an agreed upon spread. Amounts outstanding as sold receivables as of March 31, 2004 consisted of one $10 million certificate with an October 2005 maturity date. The Revolver, which has a June 2004 maturity date, bears interest at
a rate of LIBOR plus an agreed upon spread and is secured by a lien on our assets. We anticipate extending or renewing the Revolver. Availability under the Revolver is subject to a borrowing base calculation. As of March 31, 2004, availability under
the Revolver was $25 million with no outstanding amounts. Terms of the Revolver limit the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver require us to maintain compliance with selected financial
covenants.



Our business is not capital asset intensive, and
capital expenditures in any year normally would not be significant in relation to our overall financial position. Generally, our capital expenditures relate to our information technology hardware and software and improvements in our distribution
center. Capital expenditures were approximately $2.5 million for the three months ended March 31, 2004, as compared to $2.3 million for the same period in 2003. We currently expect capital expenditures of approximately $6 million to $10 million in
the remaining nine months of 2004.



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Managements Discussion and Analysis of Financial Condition and Results of Operations



Contractual Obligations



Our contractual obligations consist of noncancelable operating leases for
facilities and equipment, which expire at various dates from 2004 to 2011, with the exception of the operating lease on our headquarters facility, which expires in 2019. Future minimum lease payments under noncancelable operating leases as of March
31, 2004 are as follows (in thousands):



|                    |  |   |       
|------------------- |  | - | ------
|Remainder of 2004   |  | $ | 5,913 
|2005                |  |   | 6,723 
|2006                |  |   | 5,189 
|2007                |  |   | 4,932 
|2008                |  |   | 4,936 
|2009 and thereafter |  |   | 43,696
|                    |  |   |       
|                    |  | $ | 71,389
|                    |  |   |       



Forward Looking Statements and Risks



This
document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may be identified by words such as
will, believe, anticipate, intend, estimate, expect, project and similar expressions. These forward-looking statements may involve known and unknown risks, and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of CompuCom Systems, Inc. and its subsidiaries to be materially different from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements concerning, among other things, our strategy, future operations, financial position, estimated
revenues and gross margins, projected operating expenses, prospects, plans and management objectives. Although we believe the expectations contained in the forward-looking statements are reasonable, we can give no assurance that the expectations
will prove correct. In addition, the forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, strategic investments or one-time events. As a result, readers should not place
undue reliance on these forward-looking statements. While it is difficult to identify each factor and event that could affect our results, there are a number of important factors that could cause actual results to differ materially from those
indicated by the forward-looking statements, and as a result could have an adverse impact on our business, financial condition and operating results. These factors include, but are not limited to, the matters set forth in our Annual Report on Form
10-K under the section Factors that Could Affect CompuComs Future Results, as well as the risks and uncertainties set forth from time to time in CompuComs Securities and Exchange Commission reports filed after this report.
CompuCom assumes no obligation and does not intend to update these forward-looking statements.



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Item 3. Quantitative and Qualitative Disclosure About Market Risk



We are exposed to interest rate risk primarily through our Securitization and Revolver. We utilize our Securitization and Revolver for our working capital
and other borrowing needs. If our effective interest rate were to increase by 100 basis points (1.00%), our annual financing expense would increase by approximately $0.1 million based on the average balances utilized under the Securitization and
Revolver during the three months ended March 31, 2004.



Currently, we do not have any significant financial investments for trading or other speculative purposes or to manage interest rate exposure.



Item 4. Controls and Procedures



As of March 31, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective in enabling us to
record, process, summarize and report information required to be included in the periodic SEC filings within the required time period. There have been no significant changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date we carried out our evaluation.



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##### Table of Contents

PART II. OTHER INFORMATION



Item 1. Legal Proceedings



We are involved in various other claims and legal actions arising in the ordinary course of business. In our opinion, these matters are not material.



Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



See Exhibit Index on page 22.



|(b) | Reports on Form 8-K
|--- | -------------------



On February 6, 2004, we filed a Current Report on Form 8-K to report a press release announcing financial results for the quarter ended December 31, 2003.



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES



Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



|                  |  |                                          
|----------------- |  | -----------------------------------------
|                  |  | COMPUCOM SYSTEMS, INC.                   
|                  |  | (Registrant)                             
|                  | 
|DATE: May 6, 2004 |  | /s/ J. Edward Coleman                    
|                  |  | J. Edward Coleman,                       
|                  |  | Chairman of the Board, President,        
|                  |  | Chief Executive Officer and Director     
|                  | 
|DATE: May 6, 2004 |  | /s/ M. Lazane Smith                      
|                  |  | M. Lazane Smith,                         
|                  |  | Senior Vice President, Finance, Chief    
|                  |  | Financial Officer, Secretary and Director



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EXHIBIT INDEX



|            |  |                                                                        
|----------- |  | -----------------------------------------------------------------------
|Exhibit No. |  | Description                                                            
|31(a)       |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31(b)       |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32(a)       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            | 
|32(b)       |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



22